The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (3 page)

In autumn 2011 this theatre was the front line of the euro crisis. At its heart was Greece’s €360 billion debt, a debt it could not repay. These tax inspectors were the very people Greece needed to be out and about gathering up every euro-cent in order to stop the national debt from ballooning completely out of control. For thousands of years the power to tax has defined sovereignty. But here it was not just that the taxmen were spending the morning in angry debate rather than collecting taxes. It was not even that they were soon to go on strike. What was extraordinary was that these tax inspectors were openly advising their fellow Greeks to defy the new ‘emergency taxes’ on property. One of the taxmen told me that some of Greece’s most celebrated politicians had once refused to pay a levy for public service television. ‘I think we should do the same now, because we simply can’t afford it,’ he says. ‘We don’t have any more money.’

When tax inspectors start to urge non-payment of tax, a country in a fiscal crisis has a serious existential problem. Greece’s historic antipathy to taxes stretches back to the days of the republic in ancient Athens. Then, indirect taxes on slaves, houses and wine were more important than direct taxes on incomes. Plato famously suggested: ‘When there is an income tax, the just man will pay more and the unjust less on the same amount of income.’ That was three millennia ago. Three centuries ago, Athens and most of the rest of Greece was firmly under the rule of the Ottomans. The leading class of Greeks then were the
prokritoi
, the tax collectors and civil servants. In his 2011 book,
Greece’s ‘Odious’ Debt
, Jason Manolopoulos says that at that time the Greeks did not pay taxes ‘as a point of pride’ against the Ottomans and their imposition of a poll tax on Christians. After the Greek War of Independence in the 1820s, the
prokritoi
took over as the ruling class. According to Manolopoulos, Greeks continued to avoid paying taxes to these politicians, and a culture of tax evasion as an expression of resistance has persisted through the generations. Clearly this theory is impossible to prove. The Greek economic journalist Matina Stevis puts it differently: ‘for several categories of [Greek] professionals – especially those who are self-employed – it always made sense to cheat. The probability of getting caught was minimal because of an ineffective and ancient tax-collection infrastructure; tax collectors themselves were at the heart of tax-evasion rings.’ The Troika reforms specifically aimed to limit this by curtailing physical meetings between taxpayer and tax collector. The statistics do show that Greece has been somewhat undertaxed compared to its European neighbours. Greece has collected about 33 to 35 per cent of GDP in total annual tax revenues over the past decade, which is some way below the EU average of 40 to 41 per cent. Finland, at 44 per cent, has almost always extracted more tax in cash terms than Greece, from a smaller economy and a population only half the size. Finland has reluctantly found itself using this tax base to help fund Greece’s obligations.

I speak to Francesca, an Athenian tax inspector, whose husband has been unemployed for two years and whose son is joining the flood of Greeks leaving their homeland. ‘My pay cheque keeps getting smaller,’ she says. ‘I used to have a salary of €2000 a month, now I barely earn €800. It’s not even enough to cover our basic needs.’ Government ministers, she says, warned her off investigating the tax affairs of the Greek elite.

This is what a country near default looks and sounds like. There’s not just a collapsing economy, there’s also a failing tax system, and the social contract between Greece’s people and its rulers is broken. Greece has been hit harder than its fellow ‘programme nations’, as the European Union calls them – or PIGs (Portugal, Ireland and Greece), as the markets refer to them. From Greece to Germany, government ministers are now liken-ing the euro crisis to a war – and it’s not uncommon to hear Winston Churchill quoted during debates about the deficit. The euro crisis is now much more than just a financial crisis. In Athens at the end of 2011 it was reaching a second phase: a remarkable, historic experiment in sovereignty.

A group of uniformed police officers staging a protest is a rare and scarcely believable sight. It was particularly strange to see such a group outside the German embassy in Athens, chanting, ‘You’re shooting us, you’re bleeding us, you’re pushing us off the cliff.’ It was a measure of how little the Greeks were prepared to thank Berlin for the borrowed euros. The protesting officers waved a banner declaiming, ‘Kick out the Troikans.’

That September, what might well be called a Troikan Horse arrived – on 5 million electricity bills. I met 40-year-old Kostas Antonopoulos at the tax collectors’ union meeting. He later rang to invite me to his flat, expensively acquired during Greece’s euro-fuelled credit boom. He shares the flat with his wife, who is six months pregnant, and his young son. The couple fear for their children’s future after watching documentaries about the impact of IMF programmes in Argentina. ‘Meet our new tax inspector,’ says Kostas, pointing to the electricity meter in his basement. His wages have halved to €900 per month, below the €1000 mortgage payment on the flat he bought during the go-go years. He can scrape the payment together this month, by raiding his savings. But he doubts he’ll be able to find the money next month. Even if he did, the electricity meter might prove to be more effective at collecting taxes than he and his colleagues.

The new property tax meant a charge of hundreds of euros for every Greek household, including pensioners and even the recently unemployed. The tax was only invented the month before to meet a €2 billion shortfall in Greece’s austerity plan. Originally it was meant to be a small, temporary charge but, as the saying goes, there is nothing more permanent than a temporary tax. So it was to prove: the property tax has doubled and is here to stay until at least the end of 2014. Greeks renamed it
haratsi
, the Turkish word used to describe the centuries-old Ottoman poll tax. Non-payers were to have their electricity cut off. This was ‘shock therapy’ indeed.

The shock therapists were the IMF and the EU. Tax rises, spending cuts and so-called structural economic reforms were Greece’s side of the bargain for the European and IMF bailout. In Washington the prospect of the IMF grappling with Greece was rather appealing. ‘Initially the Greek crisis was received with great excitement,’ a senior IMF official told me. ‘An advanced country… Wow, we’re going to save Greece!’ The IMF was far more experienced at dealing with low- and middle-income countries after banking busts. However, it had also learnt that its standard-issue medicine had to be dispensed carefully. The sequencing of policy mattered, as did the timing.

The IMF had been brought in at the insistence of Germany. ‘The IMF was the only institution which has the experience with adaptation programmes,’ said a senior official in Berlin. ‘European institutions have never done it, we were sure that they would be too weak to tell a member country what to do.’ It was an early expression of the divide between Angela Merkel’s government in Berlin and the European Central Bank in Frankfurt. The ECB thought it could handle Europe’s problem nations on its own, a position described as ‘complete wishful thinking’ at the IMF. The ECB was first and foremost an institution concerned with monetary policy, the setting of a single base interest rate across the Eurozone, as well as the logistics of running a pan-continental currency. The ECB over a series of bailouts was to emerge as bad cop to the IMF’s good cop. But there were a good number of splits in the Troika, as well as an Anglo-Saxon/European split within the IMF itself. The ECB, keen to establish its hardline credentials, was uncompromising on so-called ‘frontloaded’ tax rises and spending cuts, and, initially, on getting Greece to repay every penny of its debts to nervous markets. ‘The ECB has taken a very conservative view on fiscal policy,’ the governor of one Eurozone central bank told me. He went on to explain what the ECB view was: ‘It’s responding to a fiscal problem, and fiscal problems can be solved by cutting back on public expenditure, which no matter how low it is, should be lower.’ In contrast, he said, ‘The IMF has a longer understanding and perhaps a better understanding of policy and politics.’ The IMF was, he said, ‘less doctrinaire’ than the ECB.

In broad terms, by 2011 Papandreou’s Greece had embarked on the fiscal measures: pay cuts, spending cuts and tax rises. However, they had done very little about the rest of the structural economic reforms promised to Greece’s new bankers in Brussels, Frankfurt and Washington. To try to get the politicians to act, in the summer of 2011 Governor Provopoulos of the Bank of Greece said the country was voting for its life and to vote down the economic reforms would be ‘suicide’ and a ‘crime’. At this point he had already overseen the Athens Airlift of billions of euros, but could say nothing about it to either the politicians or the citizens of Greece. Provopoulos had a dual role – as representative of the Greek people at the European Central Bank in Frankfurt, and as representative of the ECB to the Greek people. In a dynamic repeated in all the bailed-out countries, the governor’s hyperbole in warning of imminent doom was no more nor less than an attempt to oblige domestic politicians to make painful decisions. In Greece, however, this pattern of brinkmanship would repeat itself, on a quarterly basis. The Greeks would struggle with the notion of no longer being sovereign masters of their fate. Each time, the Greek people, the financial markets and the euro itself would be pushed to the brink by the increasingly explicit threats of the drachmailers.

Parliament duly passed the measures demanded by the Troika, and so the latter released the bailout money. However, it was not long before the brinkmanship resumed. When Troika inspectors returned to Greece in September 2011, they found that though the Greeks had passed the measures, they had not actually applied them. Greece’s finance minister at the time, Evangelos Venizelos, later told his party that at this point the Troika offered Greece a ‘velvet exit’ from the euro, smoothed with EU money – another form of drachmail designed to shock Greek politicians into compliance with the loan conditions. The end result was the hated electricity tax, the tax that Venizelos would come to blame for toppling his government later that year.

For the Troika overlords of Greece, the real problem was that the country was not implementing the programme it had agreed – partly because of the actions of aggrieved groups like the striking tax collectors. A former IMF official told me they should have been aware of the ‘massive political obstacles’ in the way of the required reforms: ‘Very, very strong vested interests in Greece blocked most things, and therefore you then get into a downward spiral because you’re trying to do things that are not being done. At the same time you have a complete inability to solve problems.’

Greece had a big enough problem even contemplating the size of its debts. But it was not simply a matter of raising taxes and cutting spending in order to fill a fiscal black hole. There was an even more fundamental problem. The standard-issue IMF template for dealing with financial crises among the developing countries, its more usual clients, required two other factors: devaluation and default. In the single-currency Eurozone, however, devaluation was not an option. That meant the internal adjustment, the so-called ‘internal devaluation’ required of Greece, would be even more brutal.

There was a certain irony in the way that, in the run-up to the 2012 Olympic Games in London, the Olympic flame was borne across the mainland of Greece with such grace, calm and efficiency. For, at the very moment that this quadrennial showcase of ancient Greek civilisation was being celebrated around the world, modern Greece was at the point of breaking with the rest of Europe.

The previous two Olympic relays had also marked significant milestones in Greece’s decline. Eight years before, the Greek capital itself had hosted the Games amid an orgy of debt-fuelled spending on stadiums and other infrastructure. In 2008, ahead of the Beijing Games, the relay ran through Greece just as fourteen years of growth was coming to a halt. And by the time the flame was heading towards London in 2012, Greece had experienced four years of recession, unemployment, austerity and misery. Greece had become a nation on the edge.

The Helliniko Olympic complex in Athens stands as a monument to this hubris, a decaying white elephant that costs £65 million a year just to maintain. Nearby lies one of a handful of new clinics run to cope with Greece’s modern reality: a surge in poverty. Dr Giorgos Vihas, a cardiologist, cannot believe the ailments that he and the other volunteer doctors are treating. ‘We never expected to see people looking through the rubbish bins to find something to eat. We never expected that the patients here would bring children as young as five or six months old, who would be underweight because the parents can’t afford to provide them with enough milk.’

Dr Vihas blames this unprecedented situation on the ‘violent change’ in living standards. He also deplores the ‘systematic destruction of the health system’ after the government signed an austerity deal with the EU. Only the charity of wealthy Greeks, he says, is keeping the clinic going. He also offers a political diagnosis. ‘The EU medication is worsening the situation,’ he says. ‘The medical prescription of the bailout leads to a certain death. The madness is that everyone knows this. The Greek patient has realised what this medicine does, and very soon will follow a different prescription.’

This is what an ‘internal devaluation’ looks like in practice. In times gone by, Greece would have defaulted on its loans – as it has done quite often – and its currency would have hit the floor, making its exporters more competitive. ‘Internal devaluation’ is a euphemism for genuinely savage cuts to public spending, higher taxes and collapsing living standards. This type of adjustment is the only route available to a country seeking to stay in the euro. One of the patients at Dr Vihas’s clinic, a Mr Karagiannis, appears to have undergone his own personal internal devaluation. ‘I am poor now, I was rich before,’ he tells me. Three years ago he was a high-flying businessman. Now he stays with his 80-year-old mother and lives off her pension. ‘I’m here today simply because I’m very poor and I cannot buy my medicines. There is no future.’ He says he feels like ‘killing the political architecture’, and praises Britain for dodging the single currency. Germany, he says, wants to reduce Greece to Bulgarian levels of poverty.